The Hong Kong Monetary Authority (HKMA) unveiled “Fintech 2025” in the mid-2021, which aims to encourage the financial sector to adopt fintech comprehensively, as well as to promote the provision of
e-HKD
The Hong Kong Monetary Authority (HKMA) unveiled “Fintech 2025” in the mid-2021, which aims to encourage the financial sector to adopt fintech comprehensively, as well as to promote the provision of fair and efficient financial services for the benefit of citizens and the society. One of its strategy is future-proofing Hong Kong for Central Bank Digital Currencies (CBDCs), which includes:
(1) collaboration with other central banks and the Bank for International Settlements (BIS) on wholesale CBDC (i.e. Multiple CBDC Bridge), so as to strengthen the potential of cross-border payments; and
(2) studying the feasibility of a retail CBDC (rCBDC) in Hong Kong, i.e. e-HKD.
Following the release of the HKMA technical whitepaper in October 2021, HKMA has published the discussion paper e-HKD: A Policy and Design Perspective in April 2022 to seek feedback from different industries for the layout plan of e-HKD.
What is e-HKD?
As a new electronic form of central bank money, e-HKD is issued under the Linked Exchange Rate System (LERS) from the Hong Kong Government. Its value would logically be expected to align with that of existing Hong Kong dollar notes and coins. The potential benefits brought by e-HKD include –
Positioning for the challenges of new forms of money
New forms of crypto-assets have emerged in recent years. A class of crypto asset called “stablecoins” is privately issued as a unit of account, with an attempt to lower their price volatility by pegging themselves to some other assets (e.g. each unit of “stablecoins” is guaranteed by USD $1). However, in view of the unregulated issuing entities, these “stablecoins” remain subject to credit, liquidity and operation risks, which in turn lacks user protection. A most famous example is the world’s top 5 “stablecoins” TerraUSD (UST) and its associated token LUNA crash, resulting in their investors’ loss amounted to USD 40 billion in a few days. While e-HKD issued by the Government is free of credit risk and backed by USD assets held in the Exchange Fund, the integrity of the e-HKD system is assured.
Supporting innovation and meeting future payment needs
HKMA has always explored using new technologies, such as distributed ledger technology (e.g. blockchain), tokenization and programmable rCBDC. Programmability supports smart contracts to facilitate automated payment. For example, travellers can receive compensation automatically in the event of flight delay.
Improving resilience and efficiency of the payment system
Even though the local electronic payment systems (e.g. credit cards, Faster Payment System, SVFs) are highly resilient and efficient, the objective of introducing e-HKD is to provide consumers with an additional payment option.
Potential challenges brought by e-HKD
HKMA foresees the following potential challenges brought by e-HKD –
Disintermediation of banks
If there is a high demand for e-HKD, banks’ deposits would decrease. Banks may react by offering higher rates of interest on deposits. Banks may also pass the higher funding cost to their customers by imposing a higher lending spread. As long as e-HKD is unremunerated, such case is less likely to happen.
Risk of a bank run
During a financial crisis period, the public seeking safe-haven assets may convert their bank deposits into e-HKD. While a similar run risk also exists with physical cash, the introduction of e-HKD may increase the risk as it would be easier and faster to obtain than cash or other safe assets. Similarly, such case is less likely to happen.
Cyber security and software risks
Given the high monetary value of the e-HKD system, it could become an attractive target of cyber attackers through compromised bank systems or malicious mobile wallet apps by impersonating financial institutions and etc. The adoption of smart contracts may also expose to coding risk and oracle risk (e.g. contracts being executed under incorrect circumstances by compromising flight delay information).
HKMA is still carrying out study on issuance mechanism of e-HKD, interoperability with large-value payment systems, privacy and data protection, legal considerations on currency issuance and preventing criminal activities. It is expected that the e-HKD could bring new opportunities to Hong Kong’s fintech development.
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